We are all Keynesians now - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

We are all Keynesians now 

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In this issue:
» Keynes remembered...at last
» PM Singh's urge to Indian scientists
» An American castigates America
» Tribute to Ben Bernanke
» ...and more!

"We are all Keynesians now," writes Joseph Stiglitz, the 2001 Nobel Prize winner for Economics. Dr. Stiglitz, taking a leaf from John Maynard Keynes (one of the founding fathers of modern economics) in his latest article, argues that the monetary policy of the central banks worldwide is likely to be ineffective. He is especially critical of the US policymakers as he notes, "The misguided policies that resulted had earlier inflicted enormous costs on developing countries. The moment of enlightenment came only when those policies also began inflicting costs on the US and other advanced industrial countries."

He argues that even fiscal policies are irrelevant, if they are focused just on tax cuts, and believes that investments in technology and infrastructure is what is needed to pump prime the US economy. "Lowering taxes on the poor and raising unemployment benefits while simultaneously increasing taxes on the rich can stimulate the economy, reduce the deficit, and reduce inequality. Cutting expenditures on the Iraq war and increasing expenditures on education can simultaneously increase output in the short and long run and reduce the deficit," he says.

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Here's what the former Federal Reserve Chairman Alan Greenspan has to say on the current state of the global financial crisis - "Global financial intermediation is broken. That intricate and interdependent system directing the world's saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants." This quote is an excerpt from an article Mr. Greenspan has written for The Economist.

Well, Mr. Greenspan is factually correct in his description of the current economic environment. However, he is reticent in his analysis of the causes (he himself is one) and wrong in his prescriptions (restoration of stock markets to enable banks to raise necessary equity). And anyways, he seems to again hint at irrational fear (human nature being what it is). But isn't this just a convenient scapegoat?

An American is annoyed with America, while wondering how India survived the credit crisis. Joe Nocera, a columnist with The New York Times, in his latest article talks about how India's prudential norms helped the country almost avert one of the worst banking crisis the world has ever seen. 'Culture' is another factor that saved India. "Indians are simply not as comfortable with credit as Americans," was his apt judgement.

Mr. Nocera then showers praise on India's anti-Greenspan banking regulator, Dr. Y. V. Reddy (the former RBI Governor). He says and we quote, "Seventy percent of the banking system in India is nationalized, so a strong regulator is critical, since any banking scandal amounts to a national political scandal as well. And in the irascible Mr. Reddy, who took office in 2003 and stepped down this past September, it had exactly the right man in the right job at the right time."

Prime Minister Dr. Manmohan Singh has urged Indian scientists to move ahead, from back end work for the world to front end work for India. He has mentioned China and Japan, where scientists have brought technological advances within reach of the common masses. In contrast, India's scientific community has not helped in commercialising science for making the daily lives of Indians better.

Dr. Singh asked the Council of Scientific and Industrial Research (CSIR) to start exploiting its 3,000 odd patents and bring them to the market. The R&D (research and development) programmes at various science departments should also be linked to the market through public private partnerships, he said. He offered to carve out a portion of the economic stimulus package for these technologies.

It is hard to disagree with the PM. Surely 'economic growth' at some point has to involve the translation of India's much-acclaimed brain power for the benefit of the average Indian!

Cocking a snook at terrorism's intentions, Mumbai's Taj Mahal Tower and Trident hotels have re-opened, just three weeks after being hit by what was India's worst ever face-off with terrorists. "We can be hurt but we cannot be knocked down," says Ratan Tata. We can't say it any better.

In the meanwhile, Business Standard reports that insurance companies have estimated the claims of Taj Mahal Hotel and Tower at Rs 4 bn and of Trident at Rs 1 bn.

The decision to re-open the Taj so fast would have elated Mr. Tata. But there are certain other things that might be causing him loss of sleep. While it may not be in a position to further provide 'hundreds of millions' of pounds to help its 100% subsidiary tide over cash crunch, Tata Motors has agreed to provide 'tens of millions' of pounds so that the UK government gets the much needed breathing space to think about the Jaguar-Land Rover bailout.

It should be noted that Tata Motors has already injected significant cash into the company and a demand slowdown back home in India has left it with little spare cash. As far as bailout is concerned, the ball firmly seems to be in Jaguar's court as non-approval of the same could lead to thousands of job losses at a time when the state of UK economy is the most fragile it has been in recent years.

Furthermore, with the US announcing similar measures for its homegrown auto makers, there is no reason to believe that the UK government could do otherwise. Tata Motors can hence breathe easy.

India markets closed in the red today (BSE-Sensex closed with around 170 points decline), led by losses in stocks from oil & gas, banking and automobile sectors. Sentiment was similar in markets across Asia, where benchmark indices in China and Hong Kong closed with 1.5% and 3.3% declines respectively. Stocks in Europe have also opened today's session in the red.


Source: Google Finance
The company that taught the world the concept of 'just in time' in order to have lean operations and reduce costs, is facing lean times itself. We are talking here of Toyota, the world's second largest automaker after General Motors. On the back of strained demand for automobiles, the company expects to report an operating loss (net sales minus direct costs of operations) for the first time since the year 1938. The loss is expected to be US$ 1.7 bn against an earlier estimate of US$ 6.8 bn profit.

US President-elect Barack Obama seems on a mission. As reported by the Wall Street Journal, he has already nominated 69 members as his government's top officials in a record 7 weeks after winning the presidency. In comparison to this, the outgoing President George W. Bush had nominated just 26 senior executives in a span of 11 weeks.

Here's our tribute to the US Federal Reserve Chairman Ben Bernanke (Santa Ben), and his likes across central banks around the world, who are flooding the world with paper currencies while interest rates have dropped to near 'zero' levels:

Dashing in the air,
In a dollar-stocked plane
O'er the Wall St. he went
Laughing but in vain

Dollars on his wings
Making bankers' spirits bright
What fun it was to throw
A doomed dollar that night

Oh, jingle bells, jingle bells
Jingle all the way
Santa 'Ben' is coming to town,
Riding on his plane

A month or two ago
We thought we'd take the ride
And soon recession came
No place was left to hide

The cost is 'zero' now
So borrow as much as you can
And if you can't repay
Think of 'Ben' again

Oh, jingle bells, jingle bells
Jingle all the way
Santa 'Ben' is coming to town,
Riding on his plane

04:55 Today's investing mantra
"To what purpose is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, of power and preeminence?" - Adam Smith in 'The Theory of Moral Sentiments'
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